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Can Tesla become a bigger company with Model S electric car? That's Elon Musk's gamble

October 19, 2011

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Photo by Tesla

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Photo by Tesla

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Photo by Tesla

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Photo by Tesla

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Photo by Tesla

Elon Musk won't leave.

His handlers have been nudging him for 45 minutes, reminding him of a dinner meeting for which he is seriously late. But the CEO of Tesla Motors Inc., the man who also founded online payment service PayPal, is clearly enjoying himself.

Earlier in the evening Musk had driven a prototype of the Tesla Model S sedan onto the factory floor in Fremont, Calif., that once had churned out Toyotas and Pontiacs. He was greeted by a crowd roar normally reserved for a rock concert.

The hulking plant now belongs to Tesla. Before taking the company public in 2010, Musk had sunk what remained of his $180 million PayPal fortune into the electric car venture, which is scheduled to start delivering the Model S next summer.

After throwing open the doors to the factory and unveiling the Model S, the charismatic Musk is surrounded by true believers--3,000 people who traveled across the globe to see the car for which they had plunked down $5,000 deposits. They fawn over the 40-year-old Musk, who revels in the back-and-forth with customers.

And he is pure salesman.

"The Model S is not the best electric car, it's the best car of any kind," Musk tells the group. "It's about the same external dimensions as a 5-series BMW, yet has twice the cargo capacity. It's got the biggest sunroof of any car. The fit and finish are superior to any premium sedan. We have the most advanced paint shop in the industry."

And he adds: "If you drive another premium sedan after driving the Model S, it's going to feel like a jalopy."

Finally, the crowd thins to such an extent that Musk is almost the last person at the party.

Satisfied he has answered every question and autographed every personalized license plate, he gives a quick wave and is gone.

That's not to say Musk and his team have all the answers. Executives say they know about all of those failed automotive dreamers, the Kaisers, Tuckers and DeLoreans. They say Tesla will change the auto industry, but admit that they must work within the same cost and logistics constraints and must use the same supply chain as everyone else in the car business.

And no one has yet proved that electric vehicles will sell on a mass scale.

'Happily scavenging'

Tesla acquired the NUMMI plant from Toyota for $42 million, plus $17 million for assembly machinery left lying around. Toyota subsequently invested $50 million in Tesla in exchange for stock, meaning Tesla basically got the plant and machinery for just $9 million.

Next, Tesla bought a $50 million Schuler SMG hydraulic stamping press--the largest in North America, Musk says--from a troubled Tier 1 supplier in Detroit for $6 million, including shipping costs.

Gilbert Passin, the Tesla manufacturing chief who once ran the Cambridge, Ontario, plant that builds the Lexus RX 350, describes Tesla's string of moves as "happily scavenging" from companies on the ropes.

A tour of the Tesla plant suggests that things are coming together. Robots are practicing for the time when vehicles are running down the line. Every surface bears a gleaming new coat of white paint, giving it the look and feel of a clean room.

Assembly of the first production-prototype body shell began Oct. 17, with the completed car set to roll down the line in November. The first salable cars will be built starting in January or February, Passin said.

But it's not as though Toyota handed Tesla a turnkey vehicle manufacturing facility that was ready to roll. Toyota shipped equipment used to build the Tacoma pickup to its San Antonio plant. And what remained could not necessarily be used to build the Model S.

Big changes

The paint shop was solvent-based; Tesla is converting it to water-based. The blanking line is being transformed to make both aluminum and steel blanks. Body assembly robots are being programmed to change tools four times per cycle, so one robot can quickly change tasks. Traditionally, each task would require its own robot, but recent technology allows for quick tool changes so multiple tasks can be completed at the same workstation. The robots are more expensive, but more efficient, Passin said.

Several rows of tooling at NUMMI will remain idle because they are of no use for building the Model S, Passin said.

Toyota sold seven press lines to Tesla as part of the transaction, but the stamping dies are still being made by Fuji Industries in Japan and Taiwan. Tesla eventually wants to have dies made in-house from castings to save money on logistics.

"Why wouldn't we try to integrate as much as we can here?" Passin asked. "The opportunities are huge. We have stamping in-house. We have plastic injection molding in-house. So to leverage the equipment we have is key from a financial standpoint, rather than pay a lot of logistics, packaging and handling costs. Plus the ability to control our own destiny, our own quality, in our working process, is huge."

Passin has poached department managers from plants in North America, France, England and Germany. He says the managers are Young Turks who may have been held back from advancement at their last companies. More than a few managers had been NUMMI employees.

Passin's favorite adjective is "kick-ass," using it to describe fellow employees, Tesla's paint technology from BASF AG, the automatic guided carts used instead of suspended conveyors to move cars down the line, even the raised bamboo-floored stage that Tesla uses for its final quality inspections.

"One month ago none of this was here," Passin said, while leading a tour of journalists through the factory. "I have shown you too much already, but I had to show you this to prove we are real."

Tesla has had its share of problems. The launch and production of the company's Lotus Elise-based Roadster--which is assembled at Lotus' plant in Hethel, England, and shipped to Menlo Park, Calif., for addition of the battery and other electric parts--were frequently delayed. A total of 1,800 have been built since 2008.

"There are lessons to be learned there," Musk said. "The valuable thing about the Roadster is learning our lessons on a small scale, so we don't repeat them on a large scale. This time around, Tesla has more resources, more expertise. This isn't our first time around the block. This is not our first rodeo."

Selling Tesla short

Wall Street still seems to harbor doubts. Tesla's share price has been volatile, peaking at $36 last December from an IPO price of $15 in July 2010, before dipping to $22 earlier this year. It surged back to the $30 range in summer, and now trades at around $25.

Overall, analysts are split over Tesla's future. Fidelity Investments' Equity Summary Score of six firms pointed to a "very bearish" sentiment. But First Call's consensus of nine analysts urged a "buy" on the stock.

Investors' gut feeling may be seen in their "short" position in Tesla stock--those betting on the price to fall. In June, investors held 15 million short-interest shares. But that has since soared to 21 million shares, 40 percent of the stock's entire "float," or available shares, according to NASDAQ.

"The real open question is not whether the first car will be delivered on time," said a former Tesla executive, who spoke on condition of anonymity. "It's unit cost, selling price and volume. Once they burn through their waiting list then they are in the real, brutal marketplace. People are betting Tesla won't have a run rate at the necessary selling price to cover their overhead and debt overhang."

Although first-year production at Tesla's factory here is estimated to be 5,000 units, Musk wants to be cranking out 20,000 Model S units starting in 2013. It will be joined by 15,000 Model X crossovers in 2013. That's a steep order in an unproven EV market.

Even then, Tesla is using barely 20 percent of the NUMMI plant. But Passin says that "the cost to maintain the other 80 percent is nothing. We need to keep it safe and secure, but we don't even need to have lighting."

Tesla co-founder Martin Eberhard, who left the venture in 2007, still thinks the company has a fair chance at success.

"The rest of the auto industry makes it easy for Tesla to shine by continuing to take an ambivalent attitude towards electric cars, and a skeptical attitude toward the technology that makes Tesla possible," Eberhard wrote in an e-mail.

"Tesla has packaged twice as much energy in the available [battery pack] space as any of the automakers have succeeded in doing with their so-called automotive cells. Tesla has a unique opportunity to succeed because the market is changing quickly, and the entrenched OEMs are not changing course quickly enough."

Price and profit

Then there's the question of price. Tesla estimates the sticker for the base 160-mile-range car will be $57,400, before federal tax credits. Models with 230- and 320-mile ranges will cost more, as will a sport model with a 4.5-second 0-to-60-mph time.

But the Model S uses an all-aluminum chassis and body, which have been used in mass production for the Audi A8 and Jaguar XJ. Aluminum is much more costly than sheet steel and it is tricky to work with.

Then there's the pricey battery pack, a flat stack of lithium ion cells. Add in a high-tech painting process, and a center stack that is an LED screen the size of two iPads, and costs add up fast.

That makes analysts wonder how Tesla can make a Model S for tens of thousands of dollars less than the price of the Audi, which stickers for $79,625 including shipping, and Jaguar, priced at $74,575 with shipping.

The Roadster's price jumped from a projected $89,000 during development to $109,000 when it went on sale--and it was just a converted Lotus Elise. Analysts wonder if the Model S will have an even greater price jump before it hits Tesla's company-owned retail outlets.

A brief test ride shows the Model S to be capable of reaching 110 mph in a short distance. Its handling is firm, but the driver can feel the car's weight as it settles into a corner.

The battery pack is below the axle level, which keeps the center of gravity low. The interior is as close to finished as one would expect from a prototype, but the center LED screen is Silicon Valley cool and functional.

The design is not a wild departure from traditional car styling, even though the lack of an engine and the battery pack's flat floor gave designers plenty of options.

"People need to think really hard about taking this leap into uncharted territory," said Tesla design chief Franz von Holzhausen, who once ran Mazda's U.S. studio. "I didn't want to alienate people by creating a vehicle that was awkward and weird. We wanted to create the cornerstone from where the brand is going to build."

Whether Tesla can build a cool electric car is becoming less of a question than whether the company can do it profitably.

"Elon's people are being given the resources to build the best car," the former executive says. "But you can't escape what the car costs them to build."

Ramping up

Tesla Motors is preparing to begin producing its Model S electric car at the former NUMMI plant in Fremont, Calif.